Educational Articles

Bank Transfer Day: Should The Banks Worry?

Theresa Brophy
| November 22, 2011

We’re fed up and we’re not going to take it anymore! That’s the message that consumers sent to the big banks on November 5th, dubbed Bank Transfer Day, the day when bank customers were urged to move their money from the big banks to supposedly more consumer friendly credit unions and smaller community banks.

Though the big banks’ plans to charge consumers fees for debit card usage may have led to the recent event, the impetus for the move-your-money movement has been percolating for some time, as anger over mortgage foreclosure practices and other bank missteps has been building over the past few years.

The banks seem to be caught between a rock and a hard place. Since the 2008 financial crisis, bank revenues have come under increased pressure. Economic uncertainty and rock-bottom interest rates have taken a toll on revenues from lending and investing. Meanwhile, financial reform initiatives have reduced fees earned from providing overdraft and other services.

To make up for the revenue shortfall, a lot of banks have started charging consumers for services that were previously free. One of the latest attempts was an effort to levy fees on debit card usage. Banks used to collect hefty fees from merchants on debit card transactions, but regulations that went into effect on October 1st now limit those fees.

The attempt to recover the lost debit card transaction revenue by charging consumers a usage fee raised consumer outrage, and most of the big banks, including JPMorgan Chase & Co. (JPM - Free JPMorgan Chase & Co. Stock Report) and Regions Financial (RF), abandoned plans to levy the usage fee. Following its competitors’ lead, so did Bank of America (BAC - Free Bank of America Stock Report). But the about-face apparently didn’t come soon enough for many bank customers, and the move-your-money movement took off.

How much of their deposit balances did the big banks lose? We don’t have firm numbers, but a survey by a national credit union association indicated that an estimated 650,000 accounts ($4.5 billion of savings) moved from banks to credit unions in early October. There probably was some movement from big to small banks, as well. If the numbers are accurate, why aren’t the big banks crying?

Right now, the banks don’t need all those low-cost deposits. They’re already awash in deposit funds but have few places to profitably deploy those funds. On the one hand, stung by stock market losses, many consumers continue to park their savings in relatively low-risk, federally-insured bank deposits, regardless of the fact that the deposit yields are extremely low. On the other hand, economic uncertainty has caused businesses and consumers to cut back on their borrowing, reducing the supply of loans that might have absorbed the surplus deposits.

Instead, banks have been using deposit funds to expand their portfolios of investment securities, which yield less than loans. They have also parked their funds with the Federal Reserve at very low interest rates. Both reinvestment strategies have hurt banks’ profitability. In the current very low interest-rate climate, the move-your-money movement may be doing banks a favor by reducing the supply of funds that needs to be profitably invested.

The current low reinvestment yields aren’t the only problem. In addition to paying interest on those deposits (albeit at extremely low interest rates), servicing deposit accounts entails some expense (personnel, systems costs), and banks pay premiums to the FDIC for deposit insurance.

Moreover, it’s likely that many of the customers pulling their savings out of the big banks are deposit-account-only customers that aren’t especially profitable for the banks. Deposit accounts are a way for banks to get their foot in the door to sell customers fee-generating products, like investment management services. Customers with only a deposit account are less profitable than those subscribing to multiple fee-based services. Note that it’s also probably easier for one-product customers to switch banks. Their business is less sticky.

So, should the big banks be worried? Perhaps not in the short run, since they have more than enough deposit funds and not enough places to reinvest their cash profitably. Moreover, relative to the size of the big banks’ deposit bases, the total of deposits transferred so far probably is small.

But losing customers could be a problem farther down the road. Banks will need those consumer deposits, a major source of low-cost funds, when loan demand in the U.S. eventually strengthens. A shortfall of consumer deposits then might force banks to fund lending by borrowing funds at interest rates well above those paid on deposits.

Moreover, as many in the industry point out, just proposing the new debit card fees may have hurt bank reputations. Consumers have long memories and, for some time to come, may shun some of the big banks that had planned to levy new fees. Meanwhile, many credit unions have stepped up their marketing programs in an effort to take advantage of the bank sector’s current unpopularity. It seems the big banks just can’t win these days.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.